Short Selling a Rental

If you own a rental property in California and are upside down where you owe more on the loan than value of the asset, or if you are unable to make loan payments, you would consider short selling the property.

The strategy needed to negotiate with your lender on a rental property is similar to that as compared with your home.

However, there are different tax, legal, and courtesy questions that you should consider before deciding on what is best.

You should talk with a certified public accountant about your specific situation and the following issues:

1. Does your financial profile classify you as “insolvent”? (where the sum of all your debts totals more than the combined value of all your assets)

2. Are there tax benefits that you’ll receive from selling your rental property ~ like passive losses that may have been accruing since you started renting the house out?

3. Does a 1099 from a lender mean that you have to pay taxes on that amount?

Collecting rents while not making payments is area where you should get legal advice from a lawyer.

Some landlords do “Rent Skimming”, which is illegal and can subject you to civil and criminal penalties.

Rent skimming is collecting income without first paying your obligatory debt (that is, using rent proceeds from your residential rental property at any time during the first year after acquiring the property without first applying it…or an equivalent amount…to your mortgage).

Renting a property that you don’t own or have authority to rent and collecting that rent for your own use is illegal.

There are courtesy issues for investors to keep in mind for their tenants when selling subject property.

First: Ask tenants to agree to a schedule of days and times for the property to be shown.

Next: Offer the tenants a rent reduction in exchange for their cooperation.

Third: Ask the tenants to agree to a month to month lease after the property is listed for sale.